The World Cup: a dream or a nightmare for the world's markets?

Previous World Cups have spelled trouble for the financial markets, while for some nations they have had a positive effect, albeit a brief one. So what impact could this year's tournament have?

Every four years a football World Cup tournament comes along and provides a massive boost for industries such as retail, tourism and telecommunications, with fans around the world rushing to purchase the latest sporting memorabilia, book flights to the host nation and text their friends to discuss the details of every goal.

But what about its impact on the financial industry? Or more specifically, what about its impact on the financial markets? Is there a correlation between the performance of global stocks and national economies, and the starting whistle at the first game of the so-called Greatest Show on Earth? It seems there may be...

Historical parallels

Dario Perkins, an economist at London's Lombard Street Research, has done a little digging in this area and has uncovered some rather interesting parallels between previous World Cup tournaments and major financial and economic events around the globe.

He notes that the first ever World Cup in 1930 coincided with the beginning of the Great Depression. Now he is certainly not saying that the inaugural tournament was responsible for what turned out to be the longest period of economic gloom in the 20th century, but it's an interesting concurrence.

Fast-forward to the 1990 World Cup, and there was another period of economic downturn affecting much of the world. Then four years later in 1994 there was the bond market crash that began in the US and spread to several other developed markets.

Then, in 1998, the tournament took place at the same time as the Asian financial crisis, when much of Southeast Asia struggled with slumping currencies, devalued stock markets and rising levels of private debt. This was also the year that Long Term Capital Management - the world's biggest hedge fund - collapsed.

More recently, there has been the US housing market crash, with prices starting to decline in 2006 when the World Cup was held in Germany, and then the beginning of the euro zone crisis in 2010 when South Africa hosted the tournament.

Of course not every World Cup year has signaled trouble for financiers and investors. The stock market crash of 1987 came a year after the 1986 tournament, and the dot-com bubble had burst well before the World Cup in 2002.

However, for Mr Perkins there is enough of a correlation between the footballing spectacle and big financial crises to interest him. "The coincidences got me thinking," he remarked. "What could go wrong this time? Based on past episodes, we should start by looking for bubbles.

So what are the risk factors as we prepare for Brazil 2014? Well, aggressive monetary easing in Japan is one, while a stalling economic recovery in the US is another. There are also concerns over the state of China's economy.

"These are just the risks we can identify," said Mr Perkins. "There are others, the unknown unknowns. For instance, nobody really knows what will happen in Ukraine."

A possible boost to stocks?

Whether the 2014 World Cup will in fact signal the beginning of a period of doom and gloom for the financial markets remains to be seen. However, there are some who believe the tournament could have a positive impact, at least in some countries.

Goldman Sachs has produced a report titled The World Cup and Economics 2014, and in it the investment bank notes that historically, the stock markets of winning nations tend to perform well after the event, at least for a brief period of time.

"On average, the victor outperforms the global market by 3.5 per cent in the first month," the report states. Although it adds: "The out-performance fades significantly after three months."

In fact, the winning team's stock market tends to under perform by around four per cent over the year following the final, so it seems any gains are short-lived, and are probably the result of a boost in sentiment among consumers - sentiment that soon wanes once the celebratory party is over.

It's a similar story for the host nation. It seems to enjoy a short-term boost in stock values immediately after the tournament, followed by market under-performance in later months.

If you combine the two - in other words, be both the host nation and the winner - the out-performance could last much longer. But as Goldman Sachs points out, there are very few examples of this to draw any meaningful conclusions. Brazil 2014 could just be one.

Of course, the trends that this report has identified could turn out to be just as coincidental as the parallels drawn by Dario Perkins between World Cup tournaments and the bursting of financial and economic bubbles.

However, stock markets and world economies do not move up and down independently. In many ways, it is human sentiment that drives them, so it would be foolish to believe that an event as globally-significant as the World Cup - one that brings people together and sparks passion, pride and patriotism like no other - would have absolutely no impact at all on the world of finance.

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